Employees who believe their legal rights have been violated at
work often sue for damages in comprehensive lawsuits that name the
company, its owners and officers, and the supervisors involved. But
can owners officers and supervisors be held liable as individuals
under federal and state employment laws? That depends on which law
the employee sues under and how the courts interpret its
language.

In such laws as the Americans With Disabilities Act (ADA), the
Fair Labor Standards Act (FLSA) and Title VII of the Civil Rights
Act of 1964, Congress made clear that an employer--meaning
company--is liable for violations. It's a long-standing legal
principle that a business is responsible for the wrongdoing of
those acting on its behalf, provided they're operating within
the scope of their employment.

What's not clear, according to federal laws, is whether
small-business owners are personally liable for the wrongdoing of
their managers, and whether the managers whose decisions supposedly
broke the law can be made to pay relevant fines out of their own
pockets. State employment laws are often no clearer. In a typical
lawsuit, the individuals named have to go to court to get their
names removed from the lawsuit, and the court has to examine the
wording of the law and how previous courts have interpreted it
before deciding whether or not to dismiss the individuals from the
lawsuit. Only then can the lawsuit proceed to trial.

Michael D. Karpeles, head of the employment law department at
Goldberg, Kohn, Bell, Black, Rosenbloom & Moritz Ltd. in
Chicago, says plaintiffs typically name individuals in hopes of
tapping other deep pockets, since the owner or manager may have
insurance to cover a judgment. They may also be angry enough with
the person whom they believe treated them poorly that they want to
get even. Naming individuals can also be a strategic move for
plaintiffs hoping to garner a lucrative settlement. Owners or
managers who are losing sleep over the prospect of having their
personal assets drained may push the company to settle the
lawsuit--by paying off the plaintiffs and releasing the individuals
from liability.

A Case In Point

Consider a recent decision made by the California Supreme Court.
The case concerned a hospice care nurse who was discharged from her
position several weeks after she revealed she had been diagnosed
with cancer. The nurse sued both the hospice care agency and her
supervisor, claiming she was a victim of discrimination based on
her medical condition, an act that is contrary to the California
Fair Employment and Housing Act.

Before the courts could consider whether anyone at the hospice
care agency had indeed discriminated against the nurse, they had to
determine whether the supervisor could be held individually liable.
This was a matter of law and precedent. The superior court
initially ruled that the supervisor should be dismissed from the
lawsuit, but the Court of Appeal reversed the decision, contending
that the supervisor could be held liable after all. The supervisor
then appealed to the California Supreme Court.

Like many courts interpreting state employment laws, the
California Supreme Court justices examined the language of similar
federal laws. In a lengthy opinion, they noted the "clear and
growing consensus" of courts that supervisors can't be
held personally liable for employment discrimination under Title
VII, the ADA or the Age Discrimination in Employment Act.

One reason is that Congress specifically exempted businesses
with fewer than 15 employees from liability under these laws
because of the cost of litigating discrimination claims, so it
would make no sense to hold an individual liable. Another reason is
that imposing liability on individual supervisors is likely to make
it harder for supervisors to make level-headed decisions. As the
judges noted in the Court of Appeals case on this subject, "It
is manifest that if every personnel manager risked losing his or
her home, retirement savings, hope of children's college
education, etc., whenever he or she made a personal management
decision, management of industrial enterprises and other economic
organizations would be seriously affected."

Because the language of the California law is so similar to the
language of the federal law, the California Supreme Court agreed
with the original ruling that the supervisor couldn't be held
liable. Even if the subsequent trial shows that the supervisor in
question was guilty of outrageous discrimination, the company, not
the individual, has to pay. That doesn't mean supervisors are
free to harass or discriminate against members of their staff. The
company is very much on the hook because of the supervisor's
conduct, and anyone whose poor judgment led to a big lawsuit can
expect to be disciplined. "[For example,] a supervisor who
sexually harasses someone may not get sued," Karpeles says,
"but he can be fired."

On The Other Hand

Other federal employment laws are usually interpreted to allow
individual liability. These include the Family and Medical Leave
Act (FMLA) and the FLSA, which governs such matters as payment of
overtime. These laws use a definition of "employer" that
more clearly includes personal liability because it includes
"any person who acts, directly or indirectly, in the interest
of an employer." That means anyone who was capable of
exercising supervisory authority over the plaintiff and who was to
some degree responsible for the violation could be left in the
lawsuit and found personally liable. For instance, a business owner
who knows a key employee is entitled to leave under the FMLA but
instead terminates the employee for taking leave may have to answer
for it in court.

So what does all this uncertainty mean? "Business owners
shouldn't think that because they have an adequately
capitalized corporation, they're protected," Karpeles
says. Make sure the bylaws of your company provide for
indemnification of owners and officers if they're dragged into
court in an employment case. Then take extra precautions to avoid
these lawsuits in the first place. Make sure you have someone on
staff responsible for human resources who can counsel you and your
supervisors on the legal side of employment decisions. Be
evenhanded in discipline, and keep thorough records of any
disciplinary actions. Even if individual owners and supervisors
aren't liable, you still don't want to have to defend your
company against an employment lawsuit.

Contact Sources

Steven C. Bahls, dean of Capital University Law School in
Columbus, Ohio, teaches entrepreneurship law. Freelance writer Jane
Easter Bahls specializes in business and legal topics.